ECB's Draghi: Premature to talk of loan exit

FRANKFURT, Germany  European Central Bank President Mario Draghi said it was premature to talk about withdrawing the bank's massive emergency loans to banks given slack economic conditions and record high levels of unemployment across the 17-country eurozone.

Draghi, speaking Wednesday after the ECB left its key interest rate unchanged at the record low of 1 percent, said the bank was still sizing up the "powerful and complex" effects of the 1 trillion ($1.3 trillion) in loans it handed out in two batches to banks on Dec. 21 and Feb. 29,

He added that the second round of the loans came too late to appear in the recent economic data the bank has to consider but stressed that the onus was on governments to push through economic reforms that will help revitalize their economies.

"So it's necessarily a partial analysis that we are having today," he said at a news conference at the ECB's headquarters in Frankfurt. "Given the present conditions of output and unemployment, which is at an historical high, any exit strategy talk is premature."

The eurozone economy shrank 0.3 percent in the fourth quarter and indicators for future growth indicators remain weak, raising the likelihood that the economy shrank again in the just-finished first quarter. Two quarters of falling output are a technical definition of recession.

Unemployment is at a record 10.8 percent for the 17 countries that use the euro, while youth unemployment has reached freakish levels of 50 percent in Spain and Greece.

Government officials in indebted countries are concerned that slashing budgets and raising taxes to reduce debt and satisfy bond investors may hurt growth in the coming months as well. That would make it harder for indebted countries to dig out of the debt woes that have pushed Greece, Ireland and Portugal to take international bailout loans and raised concerns about Italy and Spain's ability to borrow affordably to maintain their own debt burdens.

Draghi's statement seemed to put a limit on remarks by other top ECB officials  and by Draghi himself  in recent days that stressed the bank's ability to quickly drain the money poured into the banking system before it has a chance to cause added inflation.

On Wednesday he emphasized that inflationary pressures remain weak  aside from high oil prices  and that the ECB needed to study the effect on bank balance sheets before discussing any further steps.

He called the loans  longer-term refinancing operations, or LTROs  "complex and powerful measure which have affected all the funding channels, all the items of the balance sheets of banks in a variety of ways. We have to look at exactly what is happening here."

Draghi repeated his earlier economic outlook, saying that the bank expects a gradual recovery this year in the eurozone from low levels of economic activity, but that there are still risks for a turn for the worse.

The decision by the 23-member governing council at the bank's Frankfurt headquarters comes at a meeting held a day earlier than usual because of the upcoming Easter holiday weekend.

The bank is regarded as in a holding pattern since making the cheap three-year loans to hundreds of banks. The loans eased a credit crunch crippling the eurozone at the end of last year and steadied the region's banking system. But top ECB officials have said they don't expect the money to immediately lead to credit expansion in a slack economy. Banks are hesitant to lend and businesses are seeing little reason to borrow in an uncertain environment.

The bank is unlikely to cut rates unless there's a significant turn for the worse. In part, that's because annual inflation of 2.6 percent remains stubbornly above its goal of just under 2 percent. The banks blames higher oil prices, not inflationary pressures from the economy.

The ECB loans also helped take easing borrowing for indebted governments such as Spain and Italy. Some of the banks that got the loans used them to buy their own government bonds, which drove down the government's cost of borrowing  or yields.

Draghi has stressed that the bank has done its part with the LTROs and two rate cuts in November and December, and that it is up to governments to cut their deficits and shake up their over-regulated economies to increase growth  the most reliable way of shrinking debt in the long term.